The Bank Credit Analysis Handbook: A Guide for Analysts, Bankers and Investors, 2nd Edition

Chapter 8

Management and Corporate Governance

I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms.

—Alan Greenspan, Chairman of the U.S. Federal Reserve 1987–2006,1

I’ve met more masters of the Universe than I would like to, people who were grossly over-rewarded and didn’t recognize that. . . . Let us be quite clear: there has been mismanagement of our banks.

—Lord Myners, City Minister2

[A] company’s corporate governance can have a material impact on its credit quality, particularly where governance practices are weak. Academic research shows a statistical link [and] the experience of recent corporate scandals—in which governance mechanisms were in many cases not strong enough to check errant management behavior—also highlights the negative credit implications of exceptionally poor corporate governance.

—Fitch Ratings3

A bank’s performance and financial condition, which are described by the various indicators defined in the preceding chapters, are a product of the environment in which the institution operates, of the decisions taken by its management, and of chance. Although the business and regulatory conditions are largely outside management’s control, how the bank responds to its operating environment is within its province. Consequently, while luck will inevitably play a part in affecting a bank’s relative success in achieving ...